Tag Archives: financialization

The CEO Story, from Profitability Crisis to Polycrisis

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Michael Roberts’ historical chart of the G20 rate of profit.

I’ve written a little about the the invention of the CEO — the title, the office, and the social position described by that term. This chart from Michael Roberts’ blog showing the declining rate of profit can help reframe that discussion.

In this view, the term “CEO” first comes into use in the midst of the profitability crisis, in the late 60s and 70s, after the postwar Golden Age. The CEO’s heyday runs through the neoliberal recovery. The Fall of the Celebrity CEO (to borrow a term from Edelman) coincides with the start of the Long Depression.

Unfortunately, Roberts’ chart doesn’t run up to the present, which would show the rate of profitability continuing its decline in the face of multiple, entangled, global crises all at once, a polycrisis:

A global polycrisis occurs when crises in multiple global systems become causally entangled in ways that significantly degrade humanity’s prospects. These interacting crises produce harms greater than the sum of those the crises would produce in isolation, were their host systems not so deeply interconnected.

Having helped steer society to this precarious juncture, has the institution of the CEO now run its course? And what would it take to reinvent it, so that the business enterprise can help address the overlapping crises we face, improve humanity’s prospects, and play a constructive role in a new social contract? 

New Citigroup CEO Has Strong Ties to Chile’s Luksic Group

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Goodbye to all that? With Andronico Luksic Craig looking on, Jane Fraser makes her exit from the May 2019 press event marking the repayment of the Banco de Chile’s subordinated debt.

Jane Fraser, who was named last week to succeed Michael Corbat as CEO of Citigroup, has longstanding business ties to one of Chile’s most powerful business conglomerates, the Luksic Group.

Antofagasta Plc, the company with plans to mine copper and nickel on the edge of the Boundary Waters, is among the conglomerate’s principal holdings — which is why I thought it would be instructive to start looking at the Fraser-Luksic connection as Citigroup prepares for its leadership transition.

It’s unclear just how much exposure Fraser has had to the mining side of the sprawling Luksic business empire. Citibank’s dealings with the Luksic Group over the years appear to be primarily through Quiñenco SA, the financial holding company through which the group controls its investments. It is clear, however, that Fraser enjoys a fairly close business relationship with Andronico Luksic Craig.

Fraser’s relationship with Andronico Luksic Craig and the Luksic Group developed as she came up through Citigroup’s Latin American leadership ranks. After a four-year stint from 2009-2013 as CEO of Citi Private Bank, which serves the bank’s wealthiest customers, the Luksic family possibly among them, Fraser was CEO of Citigroup Latin America from 2015-2018. During that period, she also served as Vice-Chairman of the Board of Banco de Chile, co-chair with Andronico Luksic Craig.

The role came with the job. In 2007, Citigroup and Luksic-controlled Quiñenco SA established a partnership that gave Citi a 32.9 percent stake in LQ Inversiones Financieras, the Quiñenco subsidiary that has held a controlling stake in Banco de Chile since 2002. (This was, not coincidentally, the year Andronico Luksic Abaroa handed the reins to his sons Andronico and Guillermo.) The Luksic Group grew rapidly after its move into banking, growing in value from $1.9 billion to $15.6 billion over a ten year period, according to a 2017 London Mining Network report, and “profits were increasingly linked to financial capital and speculation.” Citi took part in that spectacular growth, and in 2010 increased its stake in LQIF to 50 percent.

The partnership with Citigroup also helped the bank through the final stages of its recovery from the financial crises of 1982-3, culminating in the repayment of the bank’s subordinated debt in May of 2019. A “dark chapter” of the Pinochet period had come to a close, thirty years after Pinochet fell from power. The event must have had special significance for Luksic, whose family had decamped to London after the 1973 military coup and only returned to Chilean investment circles with the onset of the financial crisis and recession of the 1980s. Settling the debt of the Banco de Chile must have felt like an act of historical redemption.

In the press conference organized for the occasion, Fraser appeared in the Paseo Ahumada side by side with Luksic and Mario Marcel, the president of Chile’s central bank.

Fraser is now set to become one of Wall Street’s most powerful bankers. Asked to comment on her promotion, Luksic was effusive in his praise, calling Fraser a “pioneering woman” and a “tremendous leader” who will make “an enormous contribution not only to Citigroup, but to the entire financial industry.”

It is still too early to say what, if anything, her move north might mean for Luksic’s business fortunes or the Chilean mining company’s North American ambitions.

CEOs Are Not The Policy Leaders We Need Right Now

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No distancing at Trump’s declaration of national emergency. CEOs are too close for public comfort.

Mike Lindell, better known as the My Pillow Guy, probably cut the most absurd and alarming figure among the CEOs standing with Donald Trump at his March 31st coronavirus press conference. A TV huckster and a religious zealot, Lindell declared from the White House podium that Trump had been elected by God’s grace, and he promised that his “uniquely positioned” and “empowered” pillow company would soon be producing about 50,000 cotton face masks per day. Though Lindell may have come off as a kook, it is hard not to appreciate the alacrity of his business pivot, and there’s no doubt we’ll need more face masks on the market, especially now that the CDC is coming around to the sensible view that masks should be essential wear.

Lindell’s outlandish behavior also draws attention to a disturbing pattern: the administration is trying to outsource the federal pandemic response to the private sector. This was the clear message when Trump declared a national emergency on March 13th, standing shoulder to shoulder with CEOs, not with medical or scientific experts or economists or seasoned administrators who know how to marshal government resources in emergencies. On Slate, Seth Maxon put it bluntly: “Trump Seems to Think a Bunch of CEOs Will Save America From the Coronavirus”; but maybe even that wasn’t blunt enough: Trump and the Trump administration have repeatedly made it clear that the federal government will not and should not lead the public health response; they are so callously laissez faire that they are abdicating the responsibilities of government, or handing the reins of government over to the private sector, while the states scramble for the resources they need.

The pattern has been in place for decades, of course. Now, we are reaping the whirlwind that anti-government ideologues and kleptocratic predators have sown since the 1970s. In some areas, the current administration has simply vacated government offices and diminished the administrative capacity of agencies; in others, they have allowed the private sector to direct and usurp the ordinary functions of federal government; and on nearly every public policy front, they defer to and entrust the public welfare — our common wealth, our public health, and our collective future — to CEOs.

This has been the case from the earliest days of this administration: in February of 2017, for example, Trump signed an executive order that allowed for broad regulatory rollbacks and, in a symbolic and premonitory gesture, handed the presidential pen to Dow Chemical CEO Andrew Liveris. Just one month later, then-EPA administrator Scott Pruitt handed Liveris another gift, when he announced the EPA would not ban the pesticide chlorpyrifos despite clear scientific evidence of its toxicity. Murray Energy’s Robert Murray had even greater influence, presenting the administration with a wish list — “an action plan” — that included pulling the United States out of the Paris Climate Accord and revoking the Clean Power Plan.

After Trump announced his intention to withdraw from Paris, Apple’s Tim Cook, known to the president as Tim Apple, said he could not step down in protest from Jared Kushner’s Office of American Innovation because he’d never joined it in the first place; but in February of 2019, he joined Ivanka Trump’s American Workforce Policy Advisory Board, along with Marillyn Hewson of Lockheed, Ginni Rometty of IBM, Walmart’s Doug McMillon, and Home Depot’s Craig Menear, among others. The board was formed to make sure “all Americans can participate in the opportunities created by the booming economy,” according to the president’s daughter; it’s unclear what they are doing — or if they are doing any policy work at all — now that the boom has gone bust.

It’s doubtful this board was ever meant to do any serious policy work, or that it could even if it tried. That’s not a knock on the participating CEOs. They may have joined with the best of intentions. There are CEOs today who sincerely want to do more to address social inequities and environmental degradation and are committed to the idea of stakeholder as opposed to shareholder capitalism. These are still aspirations, however, not business requirements, and they will remain aspirations without a major rethink and reorganization of the business enterprise. Meanwhile, CEOs have other, competing priorities, as well as a fiduciary duty to uphold. To the extent they must focus on short-term financial results, CEOs simply do not and cannot act primarily in the broad, long-term public interest — even if sometimes business and the public interest happen to coincide, as they might, at the moment, for Mike Lindell.

The C-Suite is not a public office and the CEO is not the model of public leadership we need.

The notion that success in the private sector makes someone suited for public office has been a source of endless mischief since at least the 1980s. People wrongly consider the president America’s CEO and the presidency a job; CEOs think they can be president; CEOs are celebrated as public benefactors and forward-thinking leaders, but it’s often hard to tell whether they are genuinely public spirited or just command an effective public relations campaign. All that makes a travesty of public service and public office and runs contrary to the public interest.

We should understand how we got to this failed state. That’s largely a story of the CEO’s rise to prominence with the financialization of the economy and of political reaction against broad public welfare schemes. The trend is toward privatizing the republic and hoarding the American future. We are confronted with “a philosophical position,” as historian Heather C. Richardson writes, “embraced by those who would overturn the active government that has presided over the United States since the New Deal.” In response to this attempted overthrow, we have to build a robust alternative, or at least do the work necessary to give future generations a head start on it.

The First CEO: A 1966 Illustration

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An early illustration of the acronym “CEO” turns up in an influential book on corporate governance from 1966.

Back in 2012, I set out to track down the earliest illustrations of the acronym “CEO” (for Chief Executive Officer) and make some historical sense of the evidence I found. For the most part, I have been confining my searches to the American context, and looking at how the term “CEO” gains cultural currency even as real-world CEOs gain unprecedented power and social prestige in American life.

My initial search led me back to 1970 and the pages of the Harvard Business Review. Now I’ve uncovered an even earlier illustration, or, rather, a whole slew of earlier illustrations, in the pages of The Corporate Director, a book by Joseph M. Juran and J. Keith Louden published in 1966.

Juran was a highly influential figure, an industrial engineer turned management guru, mentor to Peter Drucker and W. Edwards Deming. He is remembered today primarily for his writings on quality. The lesser known Louden started out as an industrial engineer (like Juran), moved into the management ranks after the Second World War, and began writing about corporate governance and business leadership starting in the 1960s, with the publication of The Corporate Director.

Their recourse to the three letter “CEO” appears to have been mainly a matter of expedience: “‘chief executive officer,’” they write, “recurs so often in this book that we have chosen to use the shorthand designation ‘CEO’ instead.” (p. 10)

For these authors, the abbreviation CEO is not merely a title, indicative of “rank”: it designates a “role,” or “the broad function or job assigned to an individual.”

This book is primarily concerned with roles, duties, functions, deeds. Hence, as far as possible, it uses words in their sense of describing roles. To the same end, it avoids, as far as possible, the use of words which are mainly descriptive of rank without describing role; for example, “President,” “Officer.” Moreover, it uses the “role-describing” words in their uncapitalized form to emphasize the role rather than the title; for example, chief executive officer, chairman of the board. The abbreviation CEO (for chief executive officer) is capitalized only to prevent a three-letter word from escaping notice. (p. 77)

At the time, those performing the role of chief executive officer (or CEO) mostly had the title of “President.” Juran and Louden cite a 1962 study of 900 industrial companies, which found that the “role of CEO” was assigned to the President 70 percent of the time; the Chairman of the Board 25 percent of the time; and the Chairman of the Board and President 5 percent of the time.

With the libraries closed due to the coronavirus, I’ve only been able to find this 1962 study — a research report from the National Industrial Conference Board and the American Society of Corporate Secretaries by John R. Kinley, entitled Corporate Directorship Practices — on Google Books. No preview is available. A search for “CEO” here turns up 4 instances, but the results do not display the actual text. So there may be a 1962 illustration waiting to be found. Page 86 looks especially promising. (It’s worth adding, however, that the three letter cluster creates a lot of false positives, so I can’t know for certain until I see the actual page.)

Even so, I am uncertain that these earlier illustrations change the big picture. It still seems pretty clear that the 1970s — with the doctrine of shareholder value and the overall financialization of the economy — mark the beginning of the CEO’s American heyday. It’s possible the recent crises and the end of the post-2008 expansion will spell its gradual and inglorious end.

A Highland Map of Lake Superior Mining

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It would be instructive to lay this map, published today by Highland Copper, over the map of Mines, Mineral Exploration, and Mineral Leasing around Lake Superior published in 2013 by the Great Lakes Indian Fish and Wildlife Commission.

Having acquired all of Rio Tinto’s exploration properties in Michigan’s Upper Peninsula, Highland now dominates sulfide-mining exploration in the UP.

A multi-billion dollar mining behemoth like Rio Tinto could arguably have left these copper, zinc and gold sites idle for a rainy day. The same can’t be said about a junior like Highland. With market capitalization of $62 million, the company paid $2 million at closing, leaving its subsidiary on the hook for an additional $16 million (in the form of a non-interest bearing promissory note), to be paid in regular installments.

According to company’s own press release, “the payments…will be accelerated if Highland publicly releases a feasibility study covering any portion of the UPX properties.” So once exploration begins with test drilling in 2018, we might see efforts to expedite permitting and development for these sites.

If UPX succeeds in taking even a fraction of these sulfide-mineral deposits from exploration to development, and if these new mines are developed under the pressure of an accelerated payment schedule, the risk to the Lake Superior watershed will be significantly heightened.

The Key Question About The Crisis of Our Times

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From Kate Soper’s review of Jason W. Moore’s Capitalism in the Web of Life: Ecology and the Accumulation of Capital.

Had it had to pay for the bounty of nature or any of its debts to the labour of animals, slaves, the reproductive and domestic work of women, and so on, [capitalism] could never have existed. ‘The great secret and the great accomplishment of capitalism’, claims Moore, ‘has been to not pay its bills.’ Historical capitalism, moreover, has been able to resolve its recurrent crises until now only because of its continued success in ripping off what it should have been paying for, only because it has always managed to extend its zone of appropriation faster than it zone of exploitation – to overcome exhausted means or ‘natural limits’ to further capitalization, by engineering, with the help of science, technology and conducive cultural-symbolic forces, ever new means of restoring cut-price supplies of food, energy, labour and materials. Cartesian talk of Nature’s wreaking revenge on Humanity at some indefinite point in the future overlooks the often spectacular ways in which capitalism has overcome its socio-economic obstacles to growth. Particularly impressive in this respect has been its capacity to harness new knowledges in the service of economic expansion – as, for example, in the critical use made of cartography in the seventeenth century, or of time measurement, and other quantifying systems. Extensive historical illustration of all these devices and accumulation strategies is provided in the various sections of Moore’s book covering the colonizations of capitalism over the centuries, the territories thereby opened up for fresh labour exploitation, and the frontiers marked out for acquisition of pivotal resources at key historical moments (sugar, corn, silver, iron, oil, etc.).

But if apocalyptic formulation of nature’s limits is mistaken, Moore does also accept that capitalism may well now be running into the buffers, or, in others words, running out of the sources of the Four Cheaps [i.e., food, energy, labor power, and raw materials], and into a situation in which overcapitalization is left with too few means of investment and further accumulation. The problem here, he suggests, is a longue durée tendency for the rate of accumulation to decline as the mass of capitalized nature rises. In the process, accumulation becomes more wasteful due to increased energy inefficiency and the toxicity of its by-products; the contradiction between the time of capitalism (always seeking to short-cut that of environmental renewal) and the time of natural reproduction is made more acute; the eco-surplus declines, and capital has nowhere else to go other than recurrent waves of financialization. The key question, then, to which Moore continually returns without any clear answer, is whether the crisis of our times is epochal or developmental; whether, against the odds, new sources of accumulation will be located, or whether the combination of physical depletion, climate change, stymied investment opportunities and new anti-systemic movements now indicate a terminal decline.

Varoufakis on Bankruptocracy

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At an anti-austerity event at the Emmanuel Centre in London yesterday evening, former Greek Minister of Finance Yanis Varoufakis offered a few remarks on the period in which we are now living. Here is my transcript of the part of his talk describing the zombie state of “bankruptocracy” that arose after “capitalism died” in 2008.

When the bank of England prints billions and billions and billions to buy these paper assets — which are mortgages, which are private debts of the banks, which are public debts and so on and so forth —  what happens is two things.

Firstly, house prices increase, in the parts of the country where wealth is concentrated, the wealthy people spend more, their income increases, so there is this sensation among the ruling class that they’ve stabilized the economy because their bottom line has been stabilized.

At the very same time, you have a situation where companies have access to cheap money, courtesy of QE. The tragedy however is, what do they do with this money? Now they’re not dumb. They know that the rest of you cannot afford their goods and services, so they’re not going to invest in productive activity, in order to produce more of them. So what do they do?

They borrow the money that the QE program is producing, giving it to the banks; the banks pass it on to the corporations; and what do the corporates do? They buy back their own shares. They borrow money to buy back their own shares because that way, they push the share price up, and guess what the bonuses of the CEOs are connected to? The share price. So they have more income, and all this money creation, liquidity creation, does not find itself not only in the pockets of working men and women; but it doesn’t even find itself into productive investment into capital.

So we have a capitalism without capital. We have a capitalism with financial capital.

We don’t live in capitalism.

In 1991 socialism collapsed; and the socialist camp and the left worldwide suffered a major defeat, both a political and a moral defeat. And we’re culpable for that, but that’s another story.

In 2008, capitalism died. I describe the new system we live in as “bankruptocracy”: the rule by bankrupt banks that have the political power to effect a transfer — a constant tsunami of money coming from the financial sector and from working people into the bankrupt banks, which remain bankrupt even though they are profitable, because the black holes created during the years of Ponzi growth prior to 2008 remain.

You can watch the whole speech here, on Varoufakis’ site.

Social License in a Less Exuberant Climate

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The things I’ve written on the new mining around Lake Superior — most of which are gathered here — might amount to nothing more than a series of postscripts to my film 1913 Massacre. P.S., then P.P.S, and so on, a long envoi or send off, I suppose, or maybe a recognition that the story we told in our film never really ended, or is about to be repeated — first time tragedy, second time: it’s still too early to say. In any case, I’ve often been struck by the ways that the new mining appeals to the very history (or what people in the UP call their mining “heritage”) Ken and I encountered while making our film, in order to claim social license.

While I’ve focused on developments around Eagle Mine, which is situated on the Yellow Dog Plains just outside the city of Marquette, Michigan, I’ve also been trying to keep track of mining activity all around the lake — the Polymet and Twin Metals projects in Minnesota, the failed Gogebic Taconite project in Wisconsin, uranium exploration on the Eastern shore, and so on; and I’ve tried to emphasize here and when talking about the subject that Eagle along with those other projects constitute the first phase of a Lake Superior mining boom.

With no effective international oversight of the lake — one of the largest bodies of freshwater in the world — the mining companies have moved in, facing down what opposition local groups can muster, promising jobs and economic development, exploiting loopholes in state laws, and buying state politicians (as Gogebic bought Scott Walker) or enlisting the services of other lackeys and lickspittles in local and regional government (as, e.g., Eagle seems to have enlisted the services of the Marquette County Road Commission).

A larger commodities boom (or pricing bubble) ushered in this Lake Superior mining boom, and that bigger boom has started to go bust, as Chinese demand for stainless steel, copper and other metals — one of the main drivers of the boom — slows. So the story ripples out way beyond the lake, to developing economies on the other side of the world, and to a larger arena of commodity markets, over which huge commodity traders like Glencore and Trafigura preside, and where the metals mined around Lake Superior are not actually used to make things the world needs (as mining companies want us to believe), but warehoused by the London Metal Exchange and financialized in complex instruments like ETFs or simply as collateral.

It’s unlikely we’ll witness the great unraveling of this global complex that some doomsayers predicted, but the slowdown has already left some miners stranded and made some projects founder or at least become riskier to undertake. Shareholders are already feeling the pain and pressures on companies to streamline operations, discard assets or service their debt will continue to mount. On the ground, these troubles should occasion some reflection on just how closely mining, global financial markets and development are now intertwined; and that volatile combination is likely to make the future for communities around the Lake even more uncertain. How committed are these companies? Whose interests do they really represent, and to whom do they answer? How resilient are they? What happens when things fall apart?

Maybe in this less exuberant climate, all the confident assertions about future prosperity, tributes to mining heritage, promises of responsible stewardship, and bids for social license to undertake mining projects will receive closer scrutiny.

Postscript: after a response from Eagle Mine’s Dan Blondeau, I’ve updated this post with a link to our exchange over my remarks here on the Marquette County Road Commission. The Michigan DNR’s green-lighting on Thursday of Graymont’s proposal to develop 10,000 acres of public forest lands into an open pit and underground limestone quarry is yet another example of Michigan public officials eagerly serving mining companies — or doing their bidding, sometimes without having been explicitly bidden.

A Third Note on The First CEO

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In a comment on one of my posts about the rise of the acronym “CEO,” a reader named Hugo reports some early Australian illustrations. I thought I’d lift Hugo’s notes from the comments and share them here, because the examples he’s found all pre-date the 1970 illustration of the acronym from the Harvard Business Review, which up until now I had taken to be the earliest. One dates back to 1914.

Time, again, to notify the dictionaries.

I found some earlier 1968 and 1950 examples in Australian newspapers, where chief executive officers were found at hospitals. I also found a 1917 [sic, but the source is from 1914] from a story about a town hall.
—
The Canberra Times, 27 July 1968, page 22:
[Begin]
Applications are invited for the above positions at the Hillston District Hospital.
…
Applications and enquiries to the undersigned or Matron Fairchild, Box 1, PO, Hillson, NSW, 2675.
R. I. Cross,
C.E.O.
[End]
—
The Sydney Morning Herald, 29 March 1950, page 30:
[Begin]
PARRAMATTA DISTRICT HOSPITAL.
Wanted. Experienced Sister to take
charge of the Out Patient Department
at this hospital.
…
N. B. FILBY,
Secretary and C.E.O.
[End]
—
Independent, 7 November 1914, page 3:
[Begin]
BEHIND THE SCENES
BY A TOWN HALL FLY
…
Of course I am the chief executive officer but I only execute by instructions.
…
“What a pity,” said the M.M., the C.E.O.
…
“Not at all, my dear young lady.” the C.E.O.’s voice was tear laden too.
[End]

Also uses G.H.U. a few times for Great High Understrapper.

I don’t think these earlier Australian instances should invalidate what I’ve said previously about the widespread use of the acronym CEO in the 1970s and 1980s. Those observations concern the use of “CEO” as an important marker of corporate power, social status and cultural celebrity in America, from roughly 1970-2010.

Still, it’s interesting to consider these early examples. The first two are abbreviations used in newspaper advertisements (maybe just to save money) for positions at hospitals, where the CEOs are clearly in charge of correspondence if not of hiring. Nothing too glamorous. [Update: And one reader, in a comment on this post, suggests that CEO in this context may mean “Catholic Education Officer,” adding that at this time in Australia, “nurses and religious orders go together.”]

The illustration from 1914 offers a satirical, behind-the-scenes account of a municipal office thrown into bureaucratic confusion by a report of 24 cows eating all the flowers and shrubs in the park. Underlings and citizens address the Chief Executive Officer by such honorifics as “Your Chief Executiveness” and “Most Magnificent” and, then, “CEO.” It is an empty title; he seems unable to execute anything at all: “Of course I am the chief executive officer,” he insists, “but I only execute by instructions.” When he finally understands the gravity of the situation, he acts: “I will tell somebody to tell somebody else to tell the inspector as soon as he comes in the morning at nine. I’m sure 24 cows won’t eat all the shrubs in that time.” He is very much the Chief, very much an Officer, but not much when it comes to Execution.

A World of Chinese Boxes

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“Total use for greater wealth.” That was the triumphant banner under which the newly formed Bureau of Reclamation would parcel out and industrialize the water resources of the western United States at the beginning of the twentieth century. Now, as we are forced to appreciate just how scarce and precious freshwater and other resources really are, and as industrial civilization itself verges on collapse, it reads more like a fool’s epitaph.

We are, of course, still in the grip of the old industrial-era logic. I see it clearly in the arguments advanced in support of Lake Superior mining. When not pushing the jobs argument — or when an economist like Thomas Power calls their bluff — mining industry proponents and apologists regularly appeal to the utility (and the necessity) of mining around Lake Superior.

“These minerals,” one Michigan labor leader explained to me, “are gonna be extracted at some time. They have to be,” he continued, because they are “important for a lot of uses.” An imperative, mining carries certain duties with it: “The world needs the minerals” of the UP, he went on to explain, “and I think we have a responsibility to develop it right, extract it right, and share it.”

At least he acknowledges that the ore extracted from Lake Superior mining operations is destined for international markets. On the Public Television show Almanac a couple of months ago, at the start of the comment period on the Polymet EIS, Executive Director of Mining Minnesota Frank Ongaro asked us to pretend that mining Minnesota “copper, nickel, platinum” would somehow make us less “import-dependent” on those metals “for everything we use, every day in our life.” That was pure jingoism, and these arguments are misleading.

Just consider the news lately around the falling price of copper, which hit an eight-month low last week. The biggest story by far has to do less with slowing Chinese demand for manufacturing and building, and more with the “use” to which copper imports are now put by Chinese players in the commodities market. According to a Reuters story focusing on these “secretive” Chinese funds, “traders estimate more than half of copper imports into China were to raise funds using the metal as collateral over the past two years.” In a tweet that Aaron Klemz shared with me, CNBC’s Deirdre Wang Morris said it was more like sixty to eighty percent of all Chinese copper imports that were being “used as loan collateral.”

A March 13 Reuters article on the last week’s sell-off of copper by Polly Yam, Fayen Wong and Melanie Burton quotes “traders who structure financing deals” saying that “the selling of copper was due to speculators not breaches of financing deals. ‘Speculators are the main driver.'” I suppose that’s meant to be reassuring.

In a typical copper financing deal, an importer puts down nearly the full value of the copper in yuan as a deposit to a bank for a letter of credit.
The importer resells the copper into the domestic market to raise cash that can be used for other investments such as real estate.
The importer can also strike a hedged deal where the metal is stored in a bonded [or LME] warehouse in China or overseas in return for a loan from a foreign bank. In both cases, the importers no longer are exposed to the copper price.

And in all cases, copper — mined everywhere at great risk to water, watersheds, wetlands and the surrounding environment — is not being put to anything like the productive uses that most people imagine, or mining companies promote. From this angle, Polymet looks like Glencore’s bid to bring Minnesota into a Chinese collateral game. Things get even weirder when you consider the case of Eagle Mine in Michigan, where Lundin Mining has secured a $600 million credit facility to mine Lake Superior copper that will ship to LME warehouses owned by big commodity players and banks, and then serve as an object of financial speculation or as collateral in return for loans. It’s a world of Chinese nested boxes: credit swaps and derivatives will be spun around loans to mine copper to back loans in a huge urbanization scheme designed to move the Chinese toward a consumer society — and so on. It’s an unsustainable scheme, and after last week some analysts believe it’s already unraveling.

Orwell wrote in the industrial era about the critical role of mining in the “metabolism” of civilization. Now, in our post-industrial world, it appears that new mining will only hasten the cancer of financialization.

Update, 19 March 2014: For more on this theme, see Tyler Durden’s discussion of copper and “hot money” flows into China, here and here.